The Economics of Health and Health Care
Seventh Edition
Instructor's Answers
Copyright  2013 by Pearson
FGS7 Answers -
1
Chapter 1 - Introduction
3. From 1960 to 1980, Spain’s share increased from 1.5% to 5.3%, an increase of 253%, the largest
percentage increase. Canada’s share increased from 5.4% to 7.0%, an increase of 30%, the smallest
percentage increase.
From 1980 to 2009, Korea’s share increased from 3.4% to 6.9%, an increase of 102.9%, the largest
percentage increase. Sweden’s share (from 1980 to 2009) increased from 8.9% to 10.0%, an
increase of 12.4%, the smallest percentage increase.
5. From 1960 to 2009, the CPI grew from 82.4 to 214.5 or by 160.3%. From 1980 to 2009, the
Hospital and Related Services index grew from 69.2 to 567.9 or by 720.7%. From 1960 to 2006 the
Physician Services index grew from 76.5 to 320.8 or by 319.3%.
6. From 1970 to 2009, Private Health Insurance grew by a multiple of 50.87 or 4,987%; Medicare
by 64.56 or 6,356% ; and Medicaid by 69.14 or 6,814%.
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2
Chapter 2 - Microeconomic Tools for Health Economics
1. An improvement in the technology of producing health would increase the health intercept. An
increase in available productive resources would increase both intercepts (i.e. the entire curve
would shift outward).
2. Inefficiency will be shown by an interior point (A) in a production-possibility diagram (Figure
E2-1).
Two efficient combinations are shown by B and C.
The cost is the decrease in production of other goods (opportunity cost), moving from point B to
point C. The amount of other goods given up is shown by BD.
3. a. Increase in supply leads to lower equilibrium price and higher equilibrium quantity.
b. Same as (a).
c. Decrease in demand leads to lower equilibrium price and lower equilibrium quantity.
d. No effect on equilibrium price and quantity, but if the ceiling price is below the equilibrium price
there will be excess demand.
4. a. This curve is linear.
b. This curve is curvilinear.
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3
5. The Food axis (horizontal) shows the maximum quantity of Food if all income is spent on food
(i.e. none on health services). The reverse holds for the OG axis (vertical).
The budget constraint will be unaffected if the income level and both prices double.
6. Elasticity is -1.5 x (300)/1050 = -0.43. The parameter -1.5 is the coefficient of the demand
relationship.
7. This problem should refer to the Table 2-5. The slope is -17.2, i.e. the reduction in the amount of
capital.
8. As noted in the Figure E2-2, the equilibrium price does not rise by as much as the tax. A firm
will move up the MR curve by the amount of the tax, but this does not lead to an equal price
increase. With a linear demand, the slope (ΔP/ΔQ) of the MR curve is twice the numerical value of
the slope of the demand curve. Thus the price increase will be 50% of the tax.
9. Qd = 1810 - 10 ps.
Qd = 1910 - 10 ps.
FGS7 Answers -
Chapter 3 - Statistical Tools for Health Economics
1.
Age 35 or less; mean = 2.39
Over age 35; mean = 4.83
2.
Age 30 or less; mean = 2.00
Age 30 - 45; mean = 3.14
Over age 45; mean = 8.25
3. Q = 5.32 - 0.92P
R2 = 0.189
Q = 1.54 + 0.08Y
R2 = 0.095
Q = -2.80 + 0.17A
R2 = 0.536
4.
Q = -1.63 - 0.55P + 0.03Y + 0.15A
(2.04) (1.01) (5.04)
R2 = 0.620
(t-statistics in parentheses)
P and A are significant at 5% level; Y is not.
Elasticity at means
Mean
Elasticity
Mean P
Mean Y
Mean A
Mean Q
2.116666
21.75862
36.60714
3.48148
-0.332
0.217
1.592
5. Assuming G = 0,
P
Y
Po
Q
2
20
3
1.4
Elasticity
-5.86
3.57
6.86
4
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6.
Elas (P)
Qa
Qb
19
29
-0.263
-0.172
5
Elas (Y)
0.211
0.138
Elasticities for group (b) are smaller, because 1 unit
increase is a smaller pct of a larger amount.
7. If price rises by $1, demand decreases by 3.3.
Initial Q is
Percent Change
350
-0.94%
If income rises by $1, demand increases by .001.
Percent Change
0.0003%
8. Good Z is a substitute. An increase in the price of Z leads to an increase in the quantity
demanded of X.
We cannot be confident about good X as a normal good, because the income coefficient is
statistically insignificant.
9. a. Cigarette consumption decreases as income rises, although the impact does not differ
significantly from zero. By this criterion cigarettes are a “necessity” and might be considered as an
“inferior good.”
b. Multiply the coefficient -0.67 by 3, that is (12 – 9). This indicates that college graduates
consume 2.01 cigarettes less than high school graduates.
10. The answer to this question depends critically on what seems to be an outlying, but apparently
correct, value for Luxembourg, with a PPP-adjusted income of 91,377 and PPP- adjusted
expenditures of 4,808.
Including Luxembourg in the regression gives,
FGS7 Answers -
Mean GDP per capita
35248.93
Mean expenditure per capita
3361.356
Regression
Expenditure = 607.2947 + 0.078 * GDP per capita
Elasticity = 0.078 * (35248.93/3361.356) = 0.82
This would show health expenditures as a “necessity,” because the elasticity is less than 1.0. An
increased income would imply a reduced share.
Excluding Luxembourg,
Mean GDP per capita
33244.35
Mean expenditure per capita
3309.698
Regression
Expenditure = -1483.81 + 0.144 * GDP per capita
Elasticity = 0.144 * (33244.35/3309.65) = 1.45
This would show health expenditures as a luxury, because the elasticity exceeds 1.0, with an
increased income implying an increased share.
Instructors can use this example, if they wish to explain to students the importance of outliers.
6
FGS7 Answers -
7
Chapter 4 – Economic Efficiency and Cost Benefit Analysis
1. At that point, the marginal social cost exceeds the marginal social benefit.
2. Assume that all costs and benefits are incurred at the end of the period.
Project 1
Project 2
Costs
Year
1
2
3
4
5
6
7
8
9
10
5000
0
0
0
0
0
0
0
0
0
Benefits
2000
2000
2000
2000
0
0
0
0
0
0
Sum
Net@6%
Net@12%
Year
-2830.19
1779.99
1679.24
1584.19
0.00
0.00
0.00
0.00
0.00
0.00
-2678.57
1594.39
1423.56
1271.04
0.00
0.00
0.00
0.00
0.00
0.00
1
2
3
4
5
6
7
8
9
10
2213.23
1610.41
Sum
Costs
5000
0
0
0
0
0
0
0
0
0
Benefits Net@6% Net@12%
0
0
0
0
0
2000
2000
2000
2000
2000
-4716.98
0.00
0.00
0.00
0.00
1409.92
1330.11
1254.82
1183.80
1116.79
-4464.29
0.00
0.00
0.00
0.00
1013.26
904.70
807.77
721.22
643.95
1578.47
-373.39
Project 1 is preferable in each case.
The project with the later returns is more competitive the lower the discount rate.
3. a. Using the criterion of marginal benefit equaling marginal cost, the efficient level of abatement
is 50. The marginal benefit (40) of going from level 50 to level 60, is exceeded by the marginal
cost, which is 45.
b. Yes, because total benefits exceed total costs. It is not efficient.
c. Even the total costs exceed the total benefits. Moreover, any level above 50% is not
economically efficient.
4.
Project
Year
Costs
Benefits
0
1
2
3
10000
0
0
0
0
4000
3500
3500
Sum
Net@6%
Net@5%
-10000.00 -10000.00
3773.58
3809.52
3114.99
3174.60
2938.67
3023.43
-172.76
7.56
Net@ 4%
-10000.00
3846.15
3235.95
3111.49
193.59
Not approved at 6% discount rate.
Approved at 5% discount rate.
Approved at 4% discount rate.
FGS7 Answers -
8
5. Average Cost/Cancer
Stage 1 - $2,000
Stage 2 - $2,476
Stage 3 - $2,830
Marginal Cost/Cancer
Stage 1 - $2,000
Stage 2 - $12,000
Stage 3 - $40,000
Stage 1 is the optimal level of screening.
6.
a. $1000
b. $600
c. $750
d. $400
e. $1150
7.
a. CS = ½ x 15 x 100 = 750; PS = ½ x 8 x 100 = 400; Total surplus = 1150
b. You're looking at the loss of CS. If Q is limited to 90, the WTP (inverse demand) is 11.5 (90% of
the linear distance between 25 and 10). So, the loss of surplus is ½ x (11.5 - 10) x 10 = 7.5. CS
falls from 750 to 742.5.
Total loss in surplus includes loss of PS as well. Loss of PS (calculated similarly) is
½ x (10-9.2) x 10 = 4, so PS falls from 400 to 396.
Total surplus falls from 1150 to 1138.5.
FGS7 Answers -
Chapter 5 - The Production of Health
1.
HS
0.000
56.054
79.273
97.089
112.108
125.341
137.304
148.305
158.545
168.162
177.259
185.911
194.177
202.106
209.735
217.097
MP
56.054
23.218
17.816
15.020
13.233
11.963
11.001
10.240
9.617
9.096
8.652
8.267
7.929
7.629
7.361
E=15
HC
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
HS
0.000
63.305
89.526
109.647
126.609
141.553
155.064
167.488
179.052
189.914
200.187
209.957
219.293
228.248
236.864
245.178
MP
63.305
26.222
20.121
16.962
14.944
13.511
12.424
11.564
10.861
10.273
9.771
9.336
8.954
8.616
8.314
Health Production
250
200
Health Status
E=10
HC
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
150
100
50
0
0
5
10
Health Care
15
HS(E=10)
HS(E=15)
9
FGS7 Answers - 10
2. For blacks, every factor except BCHS.
For whites, WIC, abortion, and prenatal care.
These may reflect lower incomes and educations.
5. The plot confirms the Prichett and Summers finding.
GDP per capita v. Life Expectancy (in years)
90
Albania
Life Expectancy (in years)
80
Germany
China
Brazil
70
US
Norway
Life Expe ctancy (in ye ars)
Russian Fed.
India
60
Bangladesh
Ethiopia
50
Nigeria
40
Afghanistan
30
20
10
0
0
10,000
20,000
30,000
40,000
50,000
GDP pe r capita
60,000
70,000
80,000
90,000
FGS7 Answers - 13
Chapter 7 - Demand for Health Capital
1. Figure E7-1 shows the limiting cases of perfect substitution (negatively sloped straight line) and
no substitution (right angle).
Figure E7-1 – Exercise 1
2. Figure E7-2 shows how the individual would spend all of his or her income on health (that is, a
corner solution at E).
Figure E7-2 – Exercise 2
3. Refer to Figure 7-65 (text), with an increase in demand, due to higher wage. The cost of capital
must be lowered due to the decreased depreciation rate.
FGS7 Answers - 14
Income
73,000
40,000
165
365
Leisure
4. We have a straight line, with the X intercept of 365 and the Y intercept of 73000. The slope is 200.
5. Indifference curve is tangent at Leisure = 165, income = 40000.
6. Vertical intercept increases to 76650. The equilibrium will show both increased leisure and
increased income, although these depend on the shapes of the indifference curves. Instructors may
with to address income and substitution effects.
7. This shifts the leisure-income possibilities curve in. The X-axis is now 355 and the Y intercept is
71000. It is likely that both leisure and income will fall, although these again will depend on the
shapes of the indifference curves.
8. a. Referring to Figure 7-6 (text), the optimal health stock will rise with an increase in wage rate.
Her increased education would also increase the demand for health capital.
b. Again referring to Figure 7-6 (text) we see an outward shift in the MEI curve. Increased
education also shifts out the MEI curve.
c. With the increase in the cost of capital, the optimal stock decreases.
9. a. Components of capital costs are forgone interest, depreciation. One gives them up to get
capital.
b. I* = 500 – 1000 x 0.10 = 400.
Equilibrium expenditure = 400 x 0.10 = 40.
c. Equilibrium level of health investment falls to 300. Equilibrium health expenditures will rise
from 40 to 60, because the MEI is seen to be inelastic.
FGS7 Answers - 15
10. According to equation (7.7), Ed will be ingesting 1000 more calories per week. With each
exercise session burning 300 calories, Ed will have to exercise 3.33 more times per week to avoid
increasing S.